What Is Needed to Spur Job Creation?

Under normal economic conditions, Washington should not manipulate taxes and spending based on short-run job creation. Instead, it should maintain fiscal balance and low marginal tax rates to promote long-run growth. The Keynesian function of boosting demand during downturns and restraining it during upturns should normally be left to the automatic fiscal stabilizers and the Federal Reserve.

Of course, recent conditions have been anything but normal, as an unusually severe recession has left 15 million people jobless and the Fed has been handcuffed by its inability to reduce interest rates below zero. Congress adopted stimulus packages in February 2008 and February 2009 to boost demand and there are now calls for a third stimulus.

The economic boost from another stimulus is likely to be limited, particularly if the Fed responds by moving interest rates back above zero more quickly than it otherwise would. Although the pace of upcoming job gains will be slow, the government can’t do very much to accelerate it. But, it can provide a much-needed safety net by extending emergency unemployment benefits.

If we adopt a third stimulus, it should focus on incentives to speed up economic activity. Extending bonus depreciation for equipment investment could do some good, at little revenue cost. A tax break for new hiring, which has support in both parties, could also help. The tax break should not be restricted to small firms, as big firms are equally effective in creating jobs. To avoid issuing more debt, the third stimulus should be financed by recapturing infrastructure money not yet spent from the second stimulus.